Superannuation and Personal Income Tax Reform

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Superannuation and Personal Income Tax Reform

• Hazel Bateman
• Geoff Kingston
• School of Economics, UNSW
• April 2007

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Our main idea

• There should be better integration between
  superannuation taxation and the personal income
  tax system

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Why?

• Improve progressivity of super taxation
• Make super more attractive to the less affluent
• Reduce double dipping
• Provide for future tax revenues
• Improve the risk sharing properties of
  superannuation

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Outline

• Taxation of retirement savings
• Australias simplified super
• Potential problems and possible reforms
• Concluding comments

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Taxation of retirement savings

• Retirement savings can be taxed on
• contributions
• investment income
• benefits
• Tax regimes
• comprehensive income tax TTE, ETT
• expenditure tax EET, TEE
• hybrid TTT

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International experience
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Australian arrangements
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Superannuation Taxation Pre 2007

• Different tax treatment by
• Employee/personal
• Employer/salary sacrifice
• Self employed
• Govt co-contribution
• Spouse, child

• Deductible contributions (15)
• Interest (15)
• Dividends (15), imputation credits
• Overseas income (15), FTCS
• Capital gains (10)

• Taxation depends on
• Tax status of super fund
• Age, year and type of contribution
• Lump sum or income stream
• Type of income stream
• Size of benefit - tax scales RBLs
• 15 annuity rebate, SATO

Earnings on underlying assets, tax exempt for
narrowly defined -complying income streams
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Simplified Superannuation Post 2007

• Conformity between self employed and
  employee/personal and employer contributions
• Caps on all contributions
• Generous transition

• Deductible contributions (15)
• Interest (15)
• Dividends (15), imputation credits
• Overseas income (15), FTCS
• Capital gains (10)

• Taxation depends on
• Tax status of super fund
• Age benefits tax free if 60
• More generous assets test

Earnings on underlying assets, tax exempt for
broadly defined - income streams satisfying min
standards
10
Taxation of retirement benefits
11
Taxes/transfers retirement income streams
No tax/transfer preference for longevity
insurance
12
Taxes/transfers and the demand for retirement
income streams
20 September 2004
Allocated pensions
Term annuities
Life annuities
TAPs
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Taxation of contributions
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Super taxes vs income taxes (2006-07)
Plus medicare levy (1.5) Excess
contributions taxed at highest mtr
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Beneficiaries of 2007 super changes

• Those who were facing the prospect of 38 tax
  rate on excessive benefits
• Those able to take advantage of liberalised age
  pension assets test
• Negative gearers reaching retirement with the
  prospect of paying income tax on rental income

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Proposed reform

• Preferred EET
• Pragmatic solution adopt US model on a
  voluntary basis as an addition to current
  arrangements

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The US model

• Most super accounts taxed at the back end, in
  line with the standard rate scale. Helps lower
  paid workers, sets up future tax revenue.
• Accounts taxed up front are optional used to
  get more super under the global cap (US44,000 pa
  in 2006) or when a higher marginal rate in
  retirement is in prospect.

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The less affluent

• It is not very unreasonable that the rich should
  contribute to the public expense, not only in
  proportion to their revenue, but something more
  than in that proportion (Smith 1776).
• Simplified Superannuation is progressive in only
  two respects limits on tax-concessional
  contributions, and means tests on the public age
  pension.

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Double dipping (ctd)

• Our proposed superannuation accounts would be
  free from taxes on contributions and earnings. By
  age 75 an amount up to the present value of the
  public age pension would be withdrawn for a
  lifetime annuity on behalf of the retiree.
• From retirement onwards, payments would be taxed
  under the regular personal income tax scale.

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Tax revenues

• Australias population aged over 65 years is
  projected to grow from 12 percent to 25 percent
  during the first half of this century.
• The ratio of people aged over 65 to those aged
  between 20 and 64 is projected to rise from 20.4
  percent to 47 percent.
• Back-end taxes would progressively lift tax
  revenues at a time when they will be at a
  premium.

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Risk sharing

• Back-end taxes interact with progressivity of the
  income tax those who have had the bad luck of
  belonging to an under-performing accumulation
  fund end up paying a lower percentage in tax.
• SG is based on defined contributions rather than
  defined benefits dispersion in retirement
  benefits will become more of an issue as the
  system matures.

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Tax analysis methods

• In place of Treasurys traditional 4 year horizon
  we need an Australian counterpart of the planned
  Dynamic Analysis Division (within the US
  Department of the Treasury). Build up the
  Retirement Income Modelling Task Force.
• Super in its accumulation phase could be left out
  of the tax expenditure statement.

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Concluding comments

• Super may be simplified, yet long term problems
  remain
• Significant benefits if US model adopted to
  bring at least some retirement saving under EET
  regime